6 Types of Commercial Real Estate Loans 2018

A commercial real estate loan is most commonly used to purchase and/or renovate an owner-occupied commercial property. An “owner-occupied” commercial property is generally considered to be a property where the business occupies at least 51% of the building. Commercial mortgages are used to finance such commercial properties as mixed-use buildings, retail centers, and office buildings.

If you’ve been in business for 2+ years, will occupy at least 51% of the building, and have a credit score above 680, you may qualify for an SBA 7a loan with Northeast Bank. Northeast Bank offers rates as low as 5.5% and loans up to $5MM. Fill out a short online form to see if you pre-qualify.

5 Types Of Commercial Real Estate Loans

Now that you understand what a commercial mortgage can be used for, let’s take a look at the 5 main types of commercial real estate loans. Each of these loans has specific terms and qualifications that make them suitable for certain types of commercial buildings.

In this article, we’re going to focus on financing options for owner-occupied commercial properties. Owner-occupied commercial real estate can include office, retail, industrial, and hospitality properties, which together account for 64% of commercial real estate loans in 2016.

1. SBA 7(a) Loan For Commercial Real Estate

An SBA 7(a) loan is a mortgage backed by the U.S. Small Business Administration. SBA 7(a) loans are the most common type of SBA loans and they help businesses purchase or refinance owner-occupied commercial properties up to $5,000,000. In 2016, 65% of all SBA 7(a) loans were issued to existing businesses while 35% were issued to new businesses. However, the majority of SBA 7(a) loans are used for working capital, although they can be used to purchase commercial real estate, too.

SBA 7(a) Loan Amount & Down Payment

An SBA 7(a) loan for commercial real estate typically finances between 85% – 90% of a commercial property’s purchase price. The U.S. Small Business Association also guarantees a maximum loan amount of $5,000,000.

This means that you should expect to cover a down payment between 10% – 15% of your commercial property’s purchase price. However, well-qualified buyers can have their cash down payment requirements waived. For example, an existing SBA-eligible business can receive this waiver if it meets the following requirements:

SBA 7(a) Interest Rates & Fees

The interest rate on SBA 7(a) loans are typically between 5% – 8.75%. SBA 7(a) loans are can have both fixed rates as well as variable interest rates. For example, variable rates are calculated as the prime rate (4%) plus a maximum of 2.75%. Variable rate SBA loans are typically fixed for 3 – 10 years before adjusting.

These fees are typically taken directly out of the loan and don’t come out of pocket. Further, some SBA lenders assess a prepayment penalty if you pay off the loan early. However, prepayment penalties are dependent on the lender. Standard penalties for prepayment are around 1% of the loan.

SBA 7(a) Loan Terms

The typical loan term of an SBA 7(a) loan for commercial real estate is between 10 – 25 years. Monthly payments are fully amortized over the 10 – 25-year term. The standard time for approval and funding is between 60 – 90 days.

SBA 7(a) Loan Qualifications

The Small Business Administration enforces strict qualifications for SBA loan approval. Specifically, you should expect to have the following prior to applying for an SBA 7(a) loan:

Further, if you expect to finance the construction of a new commercial property, your business will need to occupy 60% of the building with plans to occupy up to 80% of the space.

Who SBA 7(a) Loans Are Right For

SBA 7(a) loans are designed to help businesses that might otherwise be denied by a bank. These loans are also geared towards stimulating economic development. For these reasons, the SBA typically only issues 7(a) loans to businesses that fall below certain revenue thresholds, which you can find a list of here.

What’s more, SBA 7(a) loans are permanent loans for long-term investors. This is why buy-and-hold investors who might get denied by the bank are good candidates for these types of loans.

Where To Get an SBA 7(a) Loan

SBA 7(a) loans can be obtained through any SBA-approved lender. These lenders range from larger traditional banks to smaller credit unions and private lenders. If you have a prior relationship with a bank or credit union, it’s best to check with them first to see if they’re approved to make SBA loans and if they’re PLP lenders.

If you’ve been in business for 2+ years, plan on occupying at least 51% of the building, and have a credit score above 680, you may qualify for an SBA 7(a) loan with Northeast Bank. Northeast Bank offers rates as low as 5.5% and loans up to $5,000,000. See if you pre-qualify.

2. CDC / SBA 504 Loan For Commercial Real Estate

A CDC / SBA 504 loan for commercial real estate is backed by the U.S. Small Business Association. CDC / SBA 504 loans help new and existing businesses purchase or refinance an owner-occupied commercial property. A CDC / SBA 504 loan is considered two loans and there is no maximum loan amount.

However, there were 5 times more SBA 7(a) loans originated in 2016, making CDC / SBA 504 loans less common. Let’s take a moment to discuss a CDC / SBA 504 loan for commercial real estate in depth.

CDC / SBA 504 Loan Amount & Down Payment

CDC / SBA 504 loans for commercial real estate typically finance properties up to 90% of the purchase price. This means that you should expect to cover a down payment around 10% of your property’s purchase price. There is no maximum loan amount for a CDC / SBA 504 loan.

It’s important to note that the loan is actually financed by two parties:

A traditional bank or lending institution

A Certified Development Company (CDC)

This causes the commercial real estate loan to have two loans. The first loan is financed by an approved bank up to 50% of the purchase price. The second loan is financed by a certified development company (CDC) up to 40% of the purchase price. The remainder is the borrower’s down payment.

CDC / SBA 504 Interest Rates & Fees

CDC / SBA 504 loans for commercial real estate typically have overall interest rates between 3.5% – 5%. Interest rates are typically fixed and payments are fully amortized throughout the loan term. Rates are calculated as an increment above the current 5- and 10-year U.S. treasury yields.

These one-time fees are typically taken directly out of the loan. Further, the CDC portion of a CDC / SBA 504 loan has prepayment penalties that start around 2.9% and decrease by as much as 10% a year. There are no CDC prepayment penalties after 10 years. Prepayment penalties with the bank portion of the loan are dependent on the lender.

CDC / SBA 504 Loan Terms

The typical loan term of a CDC / 504 loan for commercial real estate is 20 years for real estate and 10 years for equipment purchases. Like the SBA 7(a) loan, the typical time to funding is between 60 – 90 days.

Similar to SBA 7(a) loans, if you’re financing new construction, your business has to occupy 60% of the commercial space. It will also need to have plans to eventually occupy as much as 80% of the property.

Further, CDC / 504 loans have the following unique requirements:

Company’s net average income must be less than $5,000,000 for the previous two years

The company cannot have a tangible net worth greater than $15,000,000

Loan amount cannot be more than the personal assets of the business owner

Finally, in order to qualify for a CDC / 504 loan for commercial real estate, companies must create or retain 1 job for every $65,000 issued.

Who CDC / SBA 504 Loans Are Right For

CDC / SBA 504 loans offer some of the lowest down payments out of all commercial real estate loans. These permanent loans are therefore best for growing companies that might not have more than 10% to use as a down payment.

What’s more, CDC / SBA 504 loans typically are only issued to businesses that are actively growing their number of employees. If your business is growing quickly, you might want to check out these types of loans.

Where To Get A CDC / SBA 504 Loan

Like SBA 7(a) loans, CDC / SBA 504 loans can be obtained through SBA-approved traditional banks, credit unions, and private lenders. If you already use a bank or credit union for your business needs, you can check to see if they’re approved to lend an SBA 504 loan.

Also like SBA 7(a) loans, you can get a CDC / 504 loan through nation-wide 504 lenders that work on financing projects of $1 million or more. Liberty SBF, for example, is a national commercial real estate lender that specializes in CDC / 504 loans. Liberty SBF offers loans of $1,000,000 to $14,000,000. Contact them for a free consultation.

3. Traditional Commercial Mortgage

A traditional commercial mortgage is a standard commercial loan issued by a bank or lending institution and not backed by the federal government. Traditional commercial mortgages are used to purchase or refinance such things as an owner-occupied office building, retail center, shopping center, industrial warehouse, and more.

Let’s take a moment to discuss traditional commercial mortgages in depth.

Traditional Commercial Mortgage Amount & Down Payment

A traditional commercial mortgage typically offers a maximum loan amount between 65% – 85% of a property’s loan-to-value (LTV) ratio. The LTV ratio represents the fair market value of a property prior to purchasing. This means that borrowers should expect to cover 15% – 35% of the property’s fair market value as the down payment.

There is no maximum loan amount with a traditional commercial mortgage. This is because these mortgages aren’t backed by the federal government and overall loan amounts are up to individual lenders.

Traditional Commercial Mortgage Terms

The typical term of a traditional commercial mortgage is between 5 – 20 years. Payments are fully amortized over the life of the loan. This means that traditional commercial mortgages are structured similarly to traditional residential mortgages.

Also like residential mortgages, traditional commercial mortgages take between 30 – 45 days for approval and funding.

Traditional Commercial Mortgage Qualifications

The qualifications for a traditional commercial mortgage are a little tougher than with a government-backed alternative. This is because the lender assumes the full risk. When applying for a traditional commercial mortgage, you should expect to have the following:

Who Traditional Commercial Mortgages Are Right For

Traditional commercial mortgages have comparatively higher qualifications for approval but lower interest rates. This means that prime borrowers or business owners with credit scores of 700+ should look into traditional commercial mortgages. Remember that these mortgages are permanent, although it’s possible to get one with a term as short as 5 years.

Where To Get A Traditional Commercial Mortgage

Traditional commercial mortgages are issued by traditional banks and lending institutions. These mortgages are often held on the balance sheet of a traditional bank as an investment. U.S. Bank, for example, is a traditional bank that offers commercial real estate loans.

If you’ve been in business for 2+ years, plan on occupying at least 51% of the building, and have a credit score above 680, you may qualify for an SBA 7(a) loan with Northeast Bank. Northeast Bank offers rates as low as 5.5% and loans up to $5,000,000. Fill out a short form online to see if you pre-qualify.

4. Commercial Bridge Loan

A commercial bridge loan is a short-term real estate loan used to a purchase owner-occupied commercial property before refinancing to a long-term mortgage at a later date. Commercial bridge loans are issued by traditional banks and lending institutions and help borrowers compete with all-cash buyers.

Commercial Bridge Loan Amount & Down Payment

Commercial bridge loans typically have a maximum loan amount equal to 80% – 90% of a property’s loan-to-value (LTV) ratio. This means that a traditional bank or lending institution will lend up to 90% of a property’s current fair market value. The remaining 10% – 20% is covered by the borrower as a down payment.

Commercial Bridge Loan Interest Rates & Fees

The interest rates found on a commercial bridge loan are typically between 6.5% – 9% or more. Monthly payments on a commercial bridge loan are typically interest-only, with the full amount repaid at the end of the term.

Typical commercial bridge loan fees:

Loan Origination Fee: 1% – 6%

Closing Costs: 2% – 5%

Exit Fee: 1%

Appraisal Fee: $475 or more

These fees are typically taken directly out of the loan and don’t come out of a borrower’s pocket. Due to the short term, traditional banks might have a prepayment penalty on a commercial bridge loan. However, this is dependent on the lender.

Commercial Bridge Loan Terms

Commercial bridge loans typically have a term between 6 months – 36 months. This means that borrowers use commercial bridge loans to purchase an owner-occupied commercial property before refinancing with a long-term loan at a later date.

The time to approval and funding is typically between 15 – 45 days. The speed in which a commercial bridge loan can be funded helps a borrower compete with all-cash buyers and close on a property quickly.

Commercial Bridge Loan Qualifications

The qualifications for a commercial bridge loan are less strict when compared to the longer-term loan options on our list. Borrowers should expect to have the following when applying for a commercial bridge loan:

Prior commercial requirements isn’t a strict requirement and is dependent on the lender. However, banks will typically want to see that you’ve previously financed a commercial property using a short-term financing option.

Who Commercial Bridge Loans Are Right For

Commercial bridge loans are best for short-term investors looking to renovate and sell a property or long-term investors looking to season or renovate a building before refinancing to a permanent mortgage. Many commercial bridge loans can finance construction and it’s therefore a good option for businesses or investors that need to rehab a property.

Where To Get A Commercial Bridge Loan

Commercial bridge loans are issued by the same types of traditional banks and lending institutions that issue traditional commercial mortgages. However, private lenders can also offer commercial bridge loans. For example, both U.S. Bank as well as Arbor Commercial Mortgage offer commercial real estate loans.

5. Commercial Hard Money Loan

A commercial hard money loan is a short-term loan used to purchase and sometimes renovate an owner-occupied commercial property before refinancing to a long-term mortgage. Commercial hard money loans are similar to commercial bridge loans in that they help businesses close fast and offer interest-only payments throughout the life of the loan.

Let’s take a moment to look at commercial hard money loans in more depth.

Commercial Hard Money Loan Amount & Down Payment

A commercial hard money loan typically has a maximum loan amount up to either:

80% Loan-to-Cost (LTC)

90% Loan-to-Value (LTV)

The loan-to-cost ratio is used when a borrower expects to purchase and renovate an owner-occupied commercial property. Loan-to-cost represents the expected cost to purchase and rehab a commercial property. Commercial hard money lenders typically issue loans up to 80% of a property’s loan-to-value.

The loan to value ratio is used when a borrower expects to purchase an owner-occupied commercial property in good condition. Loan-to-value therefore represents the current fair market value of the property. Commercial hard money lenders typically issue loans up to 90% of a property’s loan-to-value.

Commercial Hard Money Loan Interest Rates & Fees

Commercial hard money loans typically have interest rates between 8% – 13%. Monthly payments are interest-only and the full amount of the loan is repaid at the end of its term.

Commercial Hard Money Loan Terms

Commercial hard money loans typically have loan terms between 1 – 3 years. Borrowers use these loans to compete with all-cash buyers to purchase and sometimes renovate a commercial property before refinancing to a long-term loan at a later date.

The time to funding for a commercial hard money loan is typically 10 – 15 days. Prequalification can take as little as 3 minutes.

Commercial Hard Money Loan Qualifications

Commercial hard money lenders offer comparatively low qualifications for approval. For example, borrowers should expect to have the following when applying for a commercial hard money loan:

Who Commercial Hard Money Loans Are Right For

Commercial hard money loans are best for short-term investors as well as long-term investors looking to renovate or season a building before refinancing to a permanent mortgage. Commercial hard money loans can help borrowers compete with all-cash buyers and those who need to move fast should look into a commercial hard money loan.

Where To Get A Commercial Hard Money Loan

Commercial hard money loans are issued by commercial hard money lenders. For example, RealtyShares is a national hard money lender that offers commercial hard money based on both LTC and LTV. They issue commercial hard money loans up to $20,000,000 and prequalification takes as little as 24 hours. Check your rates today:

Bottom Line: Commercial Real Estate Loans

Commercial real estate loan rates are often lower than most other business loans. That’s because they’re backed by owner-occupied commercial properties in most cases. The types of owner-occupied properties financed by a commercial real estate loan include such things as mixed-use buildings, retail centers, and office buildings. However, businesses must typically occupy at least 51% of these properties.

If you’ve been in business for 2+ years, plan on occupying at least 51% of the building, and have a credit score above 680, you may qualify for an SBA 7(a) loan with Northeast Bank. Northeast Bank offers rates as low as 5.5% and loans up to $5,000,000. Fill out a short form to see if you pre-qualify.

About the Author

Evan Tarver is a staff writer at Fit Small Business, specializing in Small Business Finance. He is also a fiction author and screenwriter. His past experience includes investment banking, managerial finance, and technology. When he isn't busy scheming his next business idea, you'll find Evan holed up in a coffee shop in his hometown of San Francisco working on the next great American fiction story.

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Hi
My name is Jose Roman. I’m planning to buy a couple buildings with 24 apartments in Puerto Rico. The purpose of these, is to rent all of them. The sales price is 1MM. I have a the money to cover the 10% of the down payment but I do not have the 1MM. Do you think I qualify for a loan like this?

Great question. The SBA commercial real estate loans listed in this article (SBA 7a and SBA 504) both typically require only 10%+ as the down payment. So, if you wanted to apply for an SBA loan for commercial real estate, you’d have enough of a down payment to qualify. The remaining qualifications would be in regards to your personal credit and creditworthiness. Both of these loans are permanent mortgages.

If you wanted a short-term mortgage for your commercial real estate needs, you could qualify for a bridge loan or hard money loan with 10%+ as a down payment. These loans have interest-only payments and require the principal to be repaid at the end of the term, typically 1 – 3 years.

However, it sounds like you’re talking about residential real estate. Unfortunately, none of the loans in this article are right for residential real estate. For a 24-unit apartment complex, your best bet is to look into multifamily financing or apartment loan financing. It’s possible to qualify for a residential real estate loan with around 10% down, typically.

Have to agree with some folks here that you should always approach other lenders to keep everybody “honest” and create a competitive environment for your financing request. After you receive several quotes, run a side-by-side analysis to see which structure/terms works best for you.

How much do the lenders look into personal debt ratio? Or do they just look at the overall credit score and then assess the business debts? I’m inquiring about the SBA 7(a) Loan and the Traditional Mortgage for a retail space.
Thank you!

Lenders will typically all look at a borrower’s personal debt ratio when applying for a 7(a) loan or traditional mortgage. A good rule of thumb is that a lender will issue a loan up to 45% – 50% of a person’s debt ratio. However, if you have an established business, you might be able to use your business’s information to obtain a loan. Still, it’s common for lenders to almost always check your personal finances (such as your debt/income ratio), when issuing loans.

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